Stay informed with free updates
Simply sign up to the Fund management myFT Digest — delivered directly to your inbox.
The new year is not truly a new year until someone has predicted that active management will do better in the coming 12 months.
Which is why Alphaville was so glad to spy this from Bank of America in our inbox (our emphasis):
Narrow market breadth created a challenging backdrop for active funds in 2023, particularly for Core and Growth managers. Less than 30% of stocks outperformed the S&P 500, the lowest annual breadth in our data history since 1987. However, breadth has recently started to improve, with 60% of stocks outperforming since November. If the rally continues to broaden, active funds will have greater odds of selecting winners in 2024. We expect more idiosyncratic opportunities next year given elevated valuation dispersion and increased public market inefficiencies, which should create a more supportive environment for stock pickers.
OK, OK — some analysts were already saying by the end of last year — BofA’s comments are just the first ones we’ve seen in 2024.
And as Callie Cox also noted here before Christmas, 2023 WAS truly “one weird-looking bull market”. Record-breaking narrowness means unless you were very overweight one or more of the Magnificent Seven you were likely to struggle.
That meant that only 38 per cent of large-cap US equity mutual fund managed to beat their benchmarks last year, for an average underperformance of 1.6 percentage points, according to BofA.
Given the backdrop, that is almost impressive. And if breadth continues to improve, that will in theory make things moderately easier for stockpickers in 2024.
However . . . some people may remember that active managers also bemoan broader rallies, because when everything goes up — because of passive investing, central banks, an ascendant Aquarius, or [fill in your favoured bugbear] — it robs them of the chance to truly shine.
A low-correlation, high-dispersion, high return environment is supposed to be stockpicking paradise. Last year was actually pretty much average in terms of correlation and dispersion, and it didn’t change anything when it came to performance. But nor did more extreme environments in other years.
In reality, market regimes ebb and flow around an immutable rock of long-term data that shows how difficult it is to successfully manage a large-cap US equity strategy. Next year will be the one for the active management comeback — and it always will be.
